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Research Project of “The Key to Online Transaction Platforms’ Business Model: Virtual Land Rent”
Time:2018-04-24 09:13:51   Clicks:

This research is a part of a more comprehensive research plan on the digital economy, the mobile-internet-based economy, its impact on the market growth, and an estimate of the online platform, its expansion, and its contribution to the GDP growth. 

In this research, the research team investigated several key factors regarding the new economy, or the mobile internet based economy. The business model of the online commerce in China were essentially dominated by big tech companies, such as Alibaba and Tencent, via their respective online platforms, namely, Taobao, QQ, and WeChat. The research team then raised the issue of zero marginal cost pricing, which means the online platform for commercial or social purposes have to be constructed with large initial investment yet very little further cost once they are done. However, if this is the case, then when marginal cost stays the same or decreases, the enterprises will only lose money since no revenues from pricing will come to set off the initial investment. 

In this research, the research team followed the logics of Ronald Coast and investigated the economic rational behind the market phenomenon. It came up with the conclusion that thanks to concentration and market externality, when the online infrastructures were constructed, the tech platforms constitute market dominance. Once this market dominance is established, the expansion of the online market itself brings in large revenues in the forms of service fees and the like. Then, the research team took an in-depth analysis of the virtual land rent in the online commercial platform with detailed variants to take into account. A survey was also utilized to analyze the competition between different online commerce platforms regarding their various business models and sales strategies. 

The conclusions are as follows. 1) thanks to the large fixed investment for construction of the online commerce platforms, and the close to zero marginal cost for providing services by these online platforms, according to the principle of price equals the marginal cost, it seems that these companies won’t make a profit; 2) thanks to the fact that online commerce platforms gather large quantity of buyers and sellers, there is high market externality that makes up for the virtual land rent as the main revenue for these online platforms; 3)the concentration of products shown on these platforms, as people page through, decreases; 4)online platforms take in revenues in the forms of platform use fees, sales commissions, and bidding for showing in the front page, etc.. 5) the online platforms also show a similar pattern as the real urban plan where the “land rent” is higher in urban centers, in the online platforms, it’s the first several pages that are most expensive. And lastly, the bidding mechanism works in its fullest form in the online platforms. 

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